SOURCE: Brocade

Brocade

February 17, 2011 16:05 ET

Brocade Reports Q1 FY2011 Results

Strong Performance in Storage Area Networking and International Ethernet Business

SAN JOSE, CA--(Marketwire - February 17, 2011) - Brocade® (NASDAQ: BRCD) today reported financial results for its first fiscal quarter ended January 29, 2011. Brocade recorded quarterly revenues of $546 million, representing an increase of 1.2% year-over-year and resulting in diluted earnings per share (EPS) of $0.06 on a GAAP basis and $0.12 on a non-GAAP basis.

In the quarter, Brocade saw product revenue growth of nearly 5% sequentially in its storage networking business driven by strong Director product revenues and record Server product revenues. Brocade also saw its international Ethernet product revenue grow 30% sequentially led by its EMEA and Asia Pacific geographies, which helped offset the expected softness in Federal spending. Brocade exceeded its expectations for EPS and operating margin in the quarter.

"We are pleased with the results of Q1 and our ability to execute to our FY2011 Playbook," said Michael Klayko, CEO of Brocade. "The industry's first Ethernet fabric solutions that we began delivering in Q1 have been very well received by customers and the industry. These solutions will help enable our customers to rapidly migrate to virtualized data centers and serve as the building blocks for their cloud-based foundational architecture."

In addition to this press release, Brocade management has posted prepared comments and slides on its Fiscal Q1 results and Fiscal Q2 outlook at www.brcd.com. Brocade will host a live webcast conference call to answer questions from investors and analysts today at 2:30 p.m. Pacific time. Questions may also be submitted in advance to ir@brocade.com.

Other Q1 product, customer and partner announcements are available at http://newsroom.brocade.com/.

Financial Highlights and Additional Financial Information


                                            Q1 2011    Q4 2010    Q1 2010
                                           ---------  ---------  ---------
Revenue                                    $    546M  $    550M  $    539M
GAAP net income                            $     27M  $     23M  $     51M
Non-GAAP net income                        $     61M  $     66M  $     94M
GAAP EPS - diluted                         $    0.06  $    0.05  $    0.11
Non-GAAP EPS - diluted                     $    0.12  $    0.14  $    0.19
Non-GAAP gross margin (1)                       62.0%      62.3%      64.9%
Non-GAAP operating margin                       17.1%      20.4%      26.0%
Adjusted EBITDA (2)                        $    114M  $    128M  $    155M
Cash provided by operations                $    118M  $    106M  $     69M

--  Q1 effective GAAP tax rate was (26.6)%; non-GAAP effective tax rate was
    15.9%.
--  Q1 total Storage Area Networking (SAN) port shipments were
    approximately 1.2 million.

Please see important note of explanation on Non-GAAP measures below, including a detailed reconciliation between GAAP and Non-GAAP information in the tables included herein.

As a % of total revenues                    Q1 2011    Q4 2010    Q1 2010
                                           ---------  ---------  ---------
OEM revenues                                      66%        61%        71%
Channel/Direct revenues                           34%        39%        29%
10% or greater customer revenues                  47%        44%        54%
Domestic revenues                                 59%        65%        63%
International revenues                            41%        35%        37%
Data Storage Revenues                             61%        57%        65%
Ethernet Products Revenues                        23%        26%        18%
Global Services Revenue                           16%        17%        17%
Ethernet Business Revenues (3)                    28%        31%        23%

As a % of Ethernet Business Revenues (3):
Enterprise, including Federal                     74%        75%        80%
  Federal only                                    13%        23%        13%
Service Provider                                  26%        25%        20%

                                            Q1 2011    Q4 2010    Q1 2010
                                           ---------  ---------  ---------
Cash, cash equivalents and investments     $    416M $     336M  $    501M
Deferred revenues                          $    265M $     251M  $    236M
Capital expenditures                       $     23M $      46M  $     47M
Total debt, net of discount                $    892M $     930M  $  1,176M
Days sales outstanding                       46 days    54 days    47 days
Employees at end of period                     4,721      4,651      4,114

  1) Q1 2010 is as adjusted due to the reclassification of system engineer
     costs from cost of revenues to sales and marketing expenses.
  2) Adjusted EBITDA is as defined in the Term Debt Credit Agreement.
  3) Ethernet Business revenues include product and support revenues.

Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. In evaluating Brocade's performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP.

Management believes that non-GAAP financial measures used in this press release allow management to gain a better understanding of Brocade's comparative operating performance both from period to period, and to its competitors' operating results. Management also believes these non-GAAP financial measures help indicate Brocade's baseline performance before gains, losses or charges that are considered by management to be outside ongoing operating results. Accordingly, management uses these non-GAAP financial measures for planning and forecasting of future periods and in making decisions regarding operations performance and the allocation of resources. Management believes these non-GAAP financial measures, when read in conjunction with Brocade's GAAP financials, provide useful information to investors by offering:

--  the ability to make more meaningful period-to-period comparisons of
    Brocade's ongoing operating results;
--  the ability to make more meaningful comparisons of Brocade's operating
    performance against industry and competitor companies;
--  the ability to better identify trends in Brocade's underlying business
    and to perform related trend analysis;
--  a better understanding of how management plans and measures Brocade's
    underlying business; and
--  an easier way to compare Brocade's most recent results of operations
    against investor and analyst financial models.

Management excludes certain gains or losses and benefits or costs in determining non-GAAP net income that are the result of infrequent events or arise outside the ordinary course of Brocade's continuing operations. Management believes that it is appropriate to evaluate Brocade's operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include: (i) legal fees associated with certain pre-acquisition litigation, (ii) legal fees associated with indemnification obligations and other related costs, net, (iii) acquisition and integration costs, (iv) loss on sale of property, and (v) interest expense related to adoption of new standard relating to convertible debt instruments.

Management also excludes the following non-cash charges in determining non-GAAP net income (i) stock-based compensation expense and (ii) amortization of purchased intangible assets. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, management believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Management believes that the expense associated with the amortization of acquisition-related intangible assets is appropriate to be excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for Brocade's newly acquired and long-held businesses.

Finally, management believes that it is appropriate to exclude the tax effects of the items noted above in order to present a more meaningful measure of non-GAAP net income.

Limitations These non-GAAP financial measures have limitations, however, because they do not include all items of income and expense that impact the Company. Management compensates for these limitations by also considering Brocade's GAAP results. The non-GAAP financial measures that Brocade uses are not prepared in accordance with, and should not be considered an alternative to measurements required by GAAP, such as operating income, net income and net income per share, and should not be considered measurements of Brocade's liquidity. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to similar measurements reported by other companies.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding Brocade's FY2011 Playbook and customer adoption of Brocade's Ethernet fabric products and technologies. These statements are based on current expectations on the date of this press release and involve a number of risks and uncertainties which may cause actual results to differ significantly from such estimates. The risks include, but are not limited to, Brocade's ability to capitalize on new Brocade sales and marketing initiatives, including expanded go-to-market activities in our Ethernet business, changes in IT spending levels in one or more of our target markets and geographical regions, Brocade's ability to continue to successfully innovate new products and services on a timely basis and achieve widespread market acceptance, and the effect of increasing market competition and changes in the industry. Certain of these and other risks are set forth in more detail in "Item 1A. Risk Factors" in Brocade's Annual Report on Form 10-K for the fiscal year ended October 30, 2010. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.

About Brocade

Brocade® (NASDAQ: BRCD) networking solutions help the world's leading organizations transition smoothly to a world where applications and information reside anywhere. (www.brocade.com)

Brocade, the B-wing symbol, BigIron, DCFM, DCX, Fabric OS, FastIron, IronView, NetIron, SAN Health, ServerIron, TurboIron, and Wingspan are registered trademarks, and Brocade Assurance, Brocade NET Health, Brocade One, Extraordinary Networks, MyBrocade, VCS, and VDX are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. Other brands, products, or service names mentioned are or may be trademarks or service marks of their respective owners.

© 2011 Brocade Communications Systems, Inc. All Rights Reserved.


                    BROCADE COMMUNICATIONS SYSTEMS, INC.
              GAAP CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                 (in thousands, except per share amounts)
                               (unaudited)

                                                       Three Months Ended
                                                      --------------------
                                                       Jan 29,    Jan 30,
                                                        2011       2010
                                                      ---------  ---------
Net revenues
  Product                                             $ 457,290  $ 449,086
  Service                                                88,727     90,406
                                                      ---------  ---------
    Total net revenues                                  546,017    539,492
Cost of revenues (1)
  Product (1)                                           177,616    165,776
  Service (1)                                            47,257     44,578
                                                      ---------  ---------
    Total cost of revenues                              224,873    210,354
                                                      ---------  ---------
      Gross margin                                      321,144    329,138
Operating expenses:
  Research and development                               91,408     90,081
  Sales and marketing (1)                               152,667    122,061
  General and administrative                             18,090     16,239
  Legal fees associated with indemnification
   obligations and other related costs, net                 124        301
  Amortization of intangible assets                      16,190     17,052
  Acquisition and integration costs                          --        204
                                                      ---------  ---------
    Total operating expenses                            278,479    245,938
                                                      ---------  ---------
Income from operations                                   42,665     83,200
Interest and other income (loss), net                       349         72
Interest expense                                        (21,546)   (22,073)
Loss on sale of investments and property, net                (6)    (8,828)
                                                      ---------  ---------
Income before  income tax provision (benefit)            21,462     52,371
Income tax provision (benefit)                           (5,717)     1,276
                                                      ---------  ---------
Net income                                            $  27,179  $  51,095
                                                      =========  =========
Net income per share - basic                          $    0.06  $    0.12
                                                      =========  =========
Net income per share - diluted                        $    0.06  $    0.11
                                                      =========  =========
Shares used in per share calculation - basic            465,108    439,080
                                                      =========  =========
Shares used in per share calculation - diluted          491,166    484,262
                                                      =========  =========

(1)  Q1 2010 is as adjusted due to the reclassification of system engineer
     costs from cost of revenues to sales and marketing expenses.




                    BROCADE COMMUNICATIONS SYSTEMS, INC.
                 GAAP CONDENSED CONSOLIDATED BALANCE SHEETS
                              (in thousands)
                               (unaudited)

                                                    Jan 29,      Oct 30,
                                                      2011         2010
                                                  -----------  -----------
Assets
Current assets:
  Cash and cash equivalents                       $   414,183  $   333,984
  Short-term investments                                2,020        1,998
                                                  -----------  -----------
    Total cash, cash equivalents and short-term
     investments                                      416,203      335,982
  Accounts receivable, net                            277,478      329,564
  Inventories                                          85,818       76,808
  Deferred tax assets                                  67,137       67,080
  Prepaid expenses and other current assets            64,829       65,017
                                                  -----------  -----------
    Total current assets                              911,465      874,451

Property and equipment, net                           540,438      539,117
Goodwill                                            1,642,768    1,644,950
Intangible assets, net                                313,343      344,000
Non-current deferred tax assets                       216,299      203,454
Other assets                                           47,759       48,203
                                                  -----------  -----------
      Total assets                                $ 3,672,072  $ 3,654,175
                                                  ===========  ===========

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                $   134,615  $   147,130
  Accrued employee compensation                        86,570       91,688
  Deferred revenue                                    199,310      185,623
  Current liabilities associated with facilities
   lease losses                                         5,218        5,992
  Current portion of capital lease obligations          1,761        1,761
  Current portion of term loan                         34,323       28,779
  Other accrued liabilities                           101,166      108,310
                                                  -----------  -----------
    Total current liabilities                         562,963      569,283

Non-current capital lease obligations, net of
 current portion                                        6,351        6,782
Term loan, net of current portion                     254,417      297,118
Senior Secured Notes                                  595,478      595,373
Non-current liabilities associated with
 facilities lease losses                                3,059        3,984
Non-current deferred revenue                           66,173       65,242
Non-current income tax liability                       63,132       61,421
Other non-current liabilities                           8,912        8,671
                                                  -----------  -----------
      Total liabilities                             1,560,485    1,607,874
                                                  -----------  -----------

Stockholders' equity:
  Common stock                                            469          461
  Additional paid-in capital                        2,088,640    2,047,563
  Accumulated other comprehensive loss                 (5,805)      (2,827)
  Retained earnings                                    28,283        1,104
                                                  -----------  -----------
    Total stockholders' equity                      2,111,587    2,046,301
                                                  -----------  -----------
      Total liabilities and stockholders' equity  $ 3,672,072  $ 3,654,175
                                                  ===========  ===========




                    BROCADE COMMUNICATIONS SYSTEMS, INC.
          GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the Three Months Ended Jan 29, 2011 and Jan 30, 2010
                            (in thousands)
                             (unaudited)

                                                       Three Months Ended
                                                      --------------------
                                                       Jan 29,    Jan 30,
                                                        2011       2010
                                                      ---------  ---------
Cash flows from operating activities:

  Net income                                          $  27,179  $  51,095

  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                        52,522     51,012
    Loss on disposal of property and equipment              176      8,813
    Amortization of debt issuance costs and original
     issue discount                                       4,729      6,663
    Net (gains) losses on investments                       (16)       168
    Provision for doubtful accounts receivable and sales
     allowances                                           2,428      3,043
    Non-cash compensation expense                        19,906     21,523
    Capitalization of interest cost                          --     (3,315)
  Changes in assets and liabilities:
    Restricted Cash                                          --          2
    Accounts receivable                                  49,812     18,104
    Inventories                                         (10,319)      (601)
    Prepaid expenses and other assets                    (3,018)     4,982
    Deferred tax assets                                      (6)        --
    Accounts payable                                    (18,582)   (39,735)
    Accrued employee compensation                        (9,416)   (67,155)
    Deferred revenue                                     14,617        935
    Other accrued liabilities                           (10,076)    16,036
    Liabilities associated with facilities lease
     losses                                              (1,700)    (2,463)
                                                      ---------  ---------
      Net cash provided by operating activities         118,236     69,107
                                                      ---------  ---------

Cash flows from investing activities:
  Purchases of short-term investments                       (25)       (24)
  Proceeds from maturities and sale of short-term
   investments                                               19          1
  Proceeds from sale of property                             --     30,185
  Purchases of property and equipment                   (23,395)   (47,317)
                                                      ---------  ---------
      Net cash used in investing activities             (23,401)   (17,155)
                                                      ---------  ---------

Cash flows from financing activities:
  Payment of principal related to the term loan         (39,748)  (506,545)
  Payment of principal related to capital leases           (431)        --
  Proceeds from Senior Secured Notes                         --    587,968
  Proceeds from issuance of common stock, net            25,477     30,031
                                                      ---------  ---------
      Net cash provided by (used in) financing
       activities                                       (14,702)   111,454
                                                      ---------  ---------
Effect of exchange rate fluctuations on cash and cash
 equivalents                                                 66     (1,016)
                                                      ---------  ---------

Net increase in cash and cash equivalents                80,199    162,390
Cash and cash equivalents, beginning of period          333,984    334,193
                                                      ---------  ---------
Cash and cash equivalents, end of period              $ 414,183  $ 496,583
                                                      =========  =========




                    BROCADE COMMUNICATIONS SYSTEMS, INC.
           RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
                (in thousands, except per share amounts)
                             (unaudited)

                                                        Three Months Ended
                                                        ------------------
                                                         Jan 29,   Jan 30,
                                                          2011      2010
                                                        --------  --------

Net income on a GAAP basis                              $ 27,179  $ 51,095
Adjustments:
  Stock-based compensation expense included in cost of
   revenues                                                2,860     2,913
  Amortization of intangible assets expense included in
   cost of revenues                                       14,466    17,850
  Legal fees associated with certain pre-acquisition
   litigation                                                 77       299
                                                        --------  --------
      Total gross margin adjustments                      17,403    21,062
                                                        --------  --------
  Legal fees associated with indemnification
   obligations and other related costs, net                  124       301
  Stock-based compensation expense included in research
   and development                                         4,283     6,183
  Stock-based compensation expense included in sales
   and marketing                                           8,792     9,700
  Stock-based compensation expense included in general
   and administrative                                      3,971     2,727
  Amortization of intangible assets expense included in
   operating expenses                                     16,190    17,052
  Acquisition and integration costs                           --       204
                                                        --------  --------
    Total operating expense adjustments                   33,360    36,167
                                                        --------  --------
      Total operating income adjustments                  50,763    57,229
  Loss on sale of property                                    --     8,783
  Interest expense related to adoption of new standards
   relating to convertible debt instruments                   --     2,142
  Income tax effect of adjustments                       (17,208)  (25,239)
                                                        --------  --------
Non-GAAP net income                                     $ 60,734  $ 94,010
                                                        ========  ========

Non-GAAP net income per share - basic                   $   0.13  $   0.21
                                                        ========  ========
Non-GAAP net income per share - diluted                 $   0.12  $   0.19
                                                        ========  ========
Shares used in non-GAAP per share calculation - basic    456,108   439,080
                                                        ========  ========
Shares used in non-GAAP per share calculation - diluted  491,166   496,346
                                                        ========  ========

  See explanation of non-GAAP information included herein.

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